FALLING YEN KEEPS CARRY TRADE ALIVE -- TAIWAN SEMICONDUCTOR IS RISING WITH CHIP STOCKS AND BOOSTS TAIWAN ETF -- OVERSOLD EURO IS BOUNCING ALONG WITH GOLD -- BOND YIELDS PULL BACK BELOW RESISTANCE AND HELP STEADY STOCK MARKET

YEN BREAKS IMPORTANT CHART SUPPORT ... The Japanese yen resumed its long-term downtrend this week by falling to new lows against most major currencies. That includes the U.S. Dollar which is also one of the world's weakest currencies. Chart 1 shows the yen falling below its 2007 low at 82. That's actually a new four-year low versus the dollar. But there's more. The monthly bars in Chart 2 show that the yen has also broken a ten-year up trendline drawn under its 1998-2002 lows. That suggests that the yen is going to get even cheaper. That may actually help the bull market in stocks and especially in emerging markets. Which brings us back to the yen carry trade. I've explained before that global traders borrow yen at low interest rates and then invest in higher-yielding currencies and markets. That includes emerging markets.

Chart 1

Chart 2

EMERGING MARKET ETF HITS NEW HIGH ... Emerging Market iShares (EEM) are hitting a new high as the yen hits a new low. One reason that I don't think that's a coincidence is shown in Chart 4. That chart overlays the yen (orange line) over the EEM (purple line) for the last two years. There's a clear inverse relationship between the two. Notice in particular the two up arrows. They show the last two times the yen jumped. Once in April 2006 and again this past February. Both times the EEM (and other global markets) suffered downside corrections. The markets turned back up when the yen started to drop. A falling yen has been one of the driving forces behind the global bull market in stocks and commodities. There's no sign yet of that relationship ending.

Chart 3

Chart 4

FALLING YEN ALSO HURTS JAPAN ISHARES ... There's another side-effect of a falling yen having to do with the relationship between Japan iShares (EWJ) and the Nikkei 225 Index. Chart 5 compares the Nikkei (bars) to the EWJ (orange line). Notice that the EWJ has been lagging behind the Nikkei since February. Chart 6 shows why. The orange line is a ratio of the EWJ divided by the Nikkei. The green line is the yen. Notice that the two lines move in the same direction. That's because the Nikkei is quoted in yen (local currency) while the EWJ is quoted in dollars. When the yen is falling, the EWJ lags behind the Nikkei. That works in the opposite direction for other foreign markets however. In countries with rising currencies (Australia, Brazil, Canada, and Europe), foreign ETFs are doing better than their respective stock markets.

Chart 5

Chart 6

TAIWAN SEMICONDUCTOR ... I wrote yesterday about new buying appearing in the semiconductor group. That buying continued on Friday as the Semiconductor (SOX) Index and Semiconductor Holders (SMH) ended the week as market leaders. Sticking with today's Asian theme, Taiwan Semiconductor has been rising as well on the NYSE. Chart 7 shows TSM hitting a three-week high. Its relative strength (RS) line has started rising as well. Chart 8 gives a better idea of how well TSM has done relative to the chip group in general. The monthly bars show the stock nearing a new five-year high. By contrast, the SOX Index (solid line) is lagging far behind the Asian stock. The strong performance of TSM also accounts for strong gains in Taiwan iShares (EWT). TSM is the biggest holding in that Asian ETF. Taiwan iShares are trading at a new six-year high today.

Chart 7

Chart 8

OVERSOLD EURO IS HELPING OVERSOLD GOLD... Most of the money coming out of the Japanese yen is moving into higher-yielding currencies like the Euro (but not the Dollar which is down). That's coming at a good time for the Euro. Chart 9 shows the Euro in an area of potential chart support at its December high near 133. It's also retraced 50% of its January/April advance which is a potential support area as well (middle green line). The chart also shows the Commodity Channel (CCI) Index in the most oversold territory in five months. Buying in the Euro is also coming at a good time for gold. The two markets usually move in the same direction (in the opposite direction of the dollar). Chart 10 shows the gold ETF (GLD) also in an oversold condition. The solid lines also show gold finding support after retracing 50% of its January/April rally. Which brings us to metal shares. Chart 11 shows the Gold & Silver (XAU) Index climbing from a 62% retracement level. Gold stocks are starting to rise faster than the commodity. That can be seen in the XAU:GLD ratio at the bottom of Chart 11. I recently wrote that gold stocks needed to lead bullion into its next upleg. That process may be beginning.

Chart 9

Chart 10

Chart 11

BOND YIELDS BACK BELOW RESISTANCE... Earlier in the week, a nine-month high in bond yields caused selling in the stock market. By week's end, however, bond yields backed off and stocks rallied. Chart 12 shows that the 10-Year T-Note yield suffered a downside reveral at mid-week and ended the week back below its summer peak near 5.25%. On Wednesday, Arthur Hill showed bond prices deeply oversold and due for a bounce. Chart 12 shows the same situation with bond yields (although in inverse fashion). Where bond "prices" were oversold, bond "yields' are overbought. Although the dip in bond yields is encouraging for bonds and stocks over the short-run, the longer-range trend still favors higher rates.

Chart 12